Will the incentive auction suffer a public perception problem?

The largest amounts are not being offered to the stations which have the most viewers, generate the most profit or produce the best programmes.

My colleague David Yip has pointed out a little-noticed aspect of the forthcoming US incentive auction. As we know, broadcasters are being offered cash incentives to give up their 600 MHz spectrum, but the differences in the amounts have been given little attention. 

Proportionately, the largest sums are not being offered to the stations which have the most viewers, generate the most profit or produce the best programmes. Who gets the most is something of a “zip code lottery.” 

Most of the biggest beneficiaries are broadcasters just outside dense urban areas. In simple terms the TV station’s high power signals may be blocking the use of several potential 600 MHz mobile licences in the city, so the FCC is prepared to offer them more to vacate the spectrum. 

And by “more”, we mean up to $224MHz/pop: over 100 times more than the lowest offer to broadcasters or 32 times the highest price ever paid for a 700 MHz licence ($7.5 MHz/pop).

Is this unjust enrichment for these broadcasters? Why should the accident of their location bequeath them such a windfall? Is it fair that stations with more viewers can receive much less?

With spectrum auctions, economic theory may tell us one thing but public opinion may take the opposite view. New Zealand was following the nobel prize winner William Vickery in 1990 when it sold a spectrum licence in a second price auction but the public was horrified when a company which offered NZ$100,000 had to pay only NZ$6.

Will the incentive auction suffer the same fate? We will find out this year when the reverse auction gives the range of prices broadcasters will accept, and the forward action tells us how much mobile operators are prepared to pay.

The US has offered other countries the use of its software to clear their own broadcast spectrum. If other nations accept, will they also offer such a wide range of incentives? The reaction of the US public will be a key factor in making this decision.